Question: The owner of a company that supplies home heating oil would like to determine whether to offer a solar heating installation service to its customers. The owner of the company has determined that a startup cost of $150,000 would be necessary, but a profit of $2,000 can be made on each solar heating system installed. The owner estimates the probability of various demand levels as follows:

Number of Units Installed Probability

50 0.40

100 0.30

200 0.30

1. Construct the payoff table, indicating the events and alternative courses of action.
2. Construct the decision tree.
3. Construct the opportunity loss table.
4. Compute the expected monetary value (EMV) for offering this solar heating system installation service.
5. Compute the expected opportunity loss (EOL) for offering this solar heating system installation service.
6. Explain the meaning of the expected value of perfect information (EVPI) in this problem.
7. Compute the return-to-risk ratio (RTRR) for offering this solar heating system installation service.
8. Based on the results of ( d ) or ( e ) and ( g ), should the company offer this solar heating system installation service? Why?
9. How would your answers to ( a ) through ( h ) be affected if the startup cost were $200,000?

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